APRA ramps up merger pressure for private health insurers

Health insurers face the prospect of forced mergers or even closures as the sector's watchdog ramped up its warnings over the impact rising premiums was having on their viability.

The Australian Prudential Regulation Authority (APRA) said on Wednesday it had started talks discussions with health insurers facing "sustainability challenges" because of the declining affordability of health insurance and ramped up its threat to force mergers if necessary.

HCF and HBF called off a friendly $4 billion merger last year . Credit:Tamara Voninski

APRA head of insurance policy development Peter Kohlhagen said that declining affordability represented an unprecedented challenge for the industry and the regulator had identified insurers who were not rising to the challenge.

"APRA has already commenced bilateral discussions with a number of insurers who we have identified as the most likely to face sustainability challenges," said Mr Kohlhagen who did not name the insurers in question.

Advertisement

He reiterated the regulator's preference for insurers to work out their own recovery plans, which could include a friendly merger, but also stepped up the threat of forced mergers.

"APRA will not hesitate to act to protect the interests of policyholders should it become necessary due to viability concerns with an insurer. That can take the form of an orderly merger or other exit from the market," he told the Health Insurance Summit in Sydney.

APRA will not hesitate to act to protect the interests of policyholders should it become necessary due to viability concerns with an insurer.

APRA's Peter Kohlhagen

APRA's role in the industry is to ensure its financial resilience, and protecting the interests of health insurance customers if a health insurer fails.

Mr Kohlhagen said the regulator requested information from Australia's 38 private health insurers last year to to see how they were managing the risks of affordability and policy change risk.

At that time, the industry faced the potential election of a Labor government vowing to cap premiums at 2 per cent for two years - well below the level of cost rises. APRA sent letters to the health insurers last week about its findings.

"We aren't convinced that any insurer yet has a robust strategy for managing the risks," said Mr Kohlhagen.

Medibank Private chief executive Craig Drummond said the rising costs could pave the way for mergers having previously flagged the company was prepared to acquire distressed rivals.

"Medibank has been saying for some time that unless we address the rising cost of healthcare in Australia, affordability will continue to be an issue," he said. "We still believe there are opportunities for consolidation in the industry."

"The pressures that are being placed on all health insurers for prudential compliance are far greater than what the industry has been accustomed to in the past," said NIB chief executive Mark Fitzgibbon.

NIB boss Mark Fitzgibbon said the sector its becoming a game of scale for health insurers.Credit:Fairfax Media

While APRA has not named which of the private insurers face difficulties, Mr Fitzgibbon said it would be difficult for some of the smaller insurers to keep up with these sorts of requirements.

"Increasingly financial services is becoming a game of scale," he said, highlighting the growing importance of technology investment for the sector.

Not-for-profit health funds HCF and HBF scotched plans to merge last year, saying it became clear joining forces would not have been in their members' best interests.

APRA has also repeatedly called on poorly-performing superannuation funds to merge with a rival, or quit the industry, if they cannot lift returns for members, a move that has also been backed by large funds such as AustralianSuper.

In banking, there has also been talk over the years of mergers between member-owned institutions.

Former Labor Treasurer Wayne Swan made changes while in office that were aimed at creating a "fifth pillar" to take on the big four.